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03/04/2007

The Economics of College and University Rankings--Posner

The choice of a college or a professional or graduate school to attend is of course an important one, and also a difficult one because of the great differences across colleges and universities in prestige, programs, facilities, faculty, amenities, location, and expense. Most of these differences translate into differences in the value of attendance at a particular school to the student. It is easy enough to determine whether the school has nice facilities and a charming location, but difficult to determine what contribution attending it will make to one's human capital, which is the principal product of education. As a result, education, including higher education, is what economists call a "credence" product, in the sense that its value cannot be determined by inspection or other reliable means before purchase, but must, in a broad sense, be taken on faith in the producer.
One might think that because most colleges and universities (for the sake of brevity, I'll generally use "college" to refer to any institution of higher education) are nonprofit institutions, they can be trusted to be candid in their marketing, but that notion is na√Øve. Institutions of higher education are highly competitive, and if anything less scrupulous in their marketing than commercial sellers, because less subject to legal sanctions for misleading advertising (it is harder to prove that one's college experience did not "work" than that the camera one bought didn't work) and because of the illusion of moral and intellectual superiority to which college faculty and administrators can easily succumb. Concern with reputation cannot be relied upon to keep colleges from making exaggerated claims of their "value added," because it is very difficult for the graduates to determine, even after a lifetime, how much of their human capital is due to their college experience. There is some market control, however. In particular, colleges that depend very heavily on alumni donations have stronger incentives than colleges that do not to avoid exaggerated claims that may cause disillusionment on the part of students after they graduate.
The combination of credence goods and unreliable sellers (in the sense of sellers not adequately deterred by legal or reputational concerns from engaging in misleading marketing efforts) produces a demand for third-party evaluations, on the model of Consumers Reports. In the case of higher education, the traditional evaluations provided by high-school guidance counselors (and by college professors and college guidance counselors with respect to professional and graduate schools) has now been supplemented by the rankings published annually by U.S. News & World Report since 1983. These rankings are at once influential and (among academics and academic administrators) controversial.
The rankings raise several interesting economic questions: the effect of rankings on information costs, in general and with particular reference to higher education; the manipulability of rankings by the colleges themselves; the effect of the rankings on education; and why U.S. News & World Report's annual rankings, though fiercely criticized by prominent universities (such as Stanford), face little competition. (There are, however, some competing ranking systems, particularly for business schools.)
There is a tradeoff in communications between information content and what I'll call absorption cost. Ranking does very well on the latter score--a ranking conveys an evaluation with great economy to the recipient; it gives the recipient an evaluation of multiple alternatives (in this case, alternative schools) at a glance. But a ranking's information content often is small, because a ranking does not reveal the size of the value differences between the ranks. One reason that disclosing the ranks of students has lost favor at elite colleges is that meritocratic standards for admission from a large applicant pool tend to create a student body most of which is rather homogeneous with respect to quality. The quality difference between number 1 and number 2, or between the top 10 and the bottom 10, may be very great, but the quality difference between number 100 and number 200 may be small, at least relative to the appearance created by such a large rank-order difference.
The information content of college rankings, as in the case of U.S. News & World Report's rankings, is particularly low because these are composite rankings. That is, different attributes are ranked, and the ranks then combined (often with weighting) to produce a final ranking. Ordinarily the weighting (even if every subordinate ranking is given the same weight) is arbitrary, which makes the final rank arbitrary. U.S. News & World Report ranks 15 separate indicators of quality to create its composite ranking of colleges.
The rankings, moreover, are manipulable by the schools, depending on the attributes that are ranked. A common attribute is the ratio of applications to acceptances. Both components of the ratio are manipulable--the number of applications by injecting a random element into acceptances, so that students who do not meet the normal admission criteria nevertheless have a chance of admission, which may motivate them to apply; and the number of acceptances by rejecting high-quality applicants who seem almost certain to be admitted by (and to accept) a higher-ranking school.
The effect of college ranking on the education industry is unclear, but my guess is that it is negative. The principal information conferred, given the information limitations of ranking in general and composite ranking in particular, is simply the rank of the college. But that is important to students (and their parents). And rightly so. Given the high costs of actually evaluating colleges, employers and even the admissions committees of professional and graduate schools are likely to give weight to a school's rank, and this will give applicants an incentive to apply to the highest-ranking school that they have a chance of being admitted to (if they can afford it). The result will be to increase the school's rank, because SAT scores and other measures of the quality of admitted students are an important factor in a college's ranking. That increase in turn will attract still better applicants, which may result in a further boost in the school's rank. The result may be that a school will attract a quality of student, and attain a rank, that is disproportionate to the quality of its teaching program. As a result, the value added by the college experience may be smaller than if rank were based solely on the quality of the college's programs, and so the students are getting less for their money than they could elsewhere. However, this conclusion must be qualified in the following important respect: the clustering of the best students at a handful of highly ranked schools may, regardless of the quality of the schools' programs, contribute to the human capital formation of these students by exposing them to other smart kids and embedding them in a valuable social network of future leaders. This may be a significant social as well as private benefit.
A final question is why, given the imperfection of U.S. News & World Report's college ranking system, yet the boost that publishing its rankings has given the magazine's circulation, no significant competitor has appeared on the scene, at least for the magazine's college and law school rankings (the latter are particularly influential). I conjecture that the market for other commercial rankings system for colleges would be weak, because the publisher of a new system could not make a convincing case that the new system was better than the established one. It could not do that because the quality of a ranking system is even more difficult to evaluate than the quality of the education provided by a given college. College applicants and their parents would thus have little incentive to consult the second system.

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